David Einhorn, Apple, And The War Between Hedge Funds And Silicon Valley

Last year David Einhorn, the billionaire hedge fund manager, predicted that Apple’s market capitalization could hit $1 trillion. Apple’s stock soared until September, but since then its shares have tumbled by 35% and that has been very costly for hedge fund managers like Einhorn.

Since 2010 hedge fund managers have feasted on Apple. It has been the single-biggest stock holding of hedge funds and they enjoyed the stock’s incredible rise to $700 a share. Apple’s poor stock performance in the stretch run of 2012, however, created huge problems for Einhorn and many other hedge fund managers who made it one of their top positions, causing the whole year to be a disappointment. Einhorn’s Greenlight hedge fund had a bad December and ended up underperforming the U.S. stock market in 2012. Compounding the misery, Apple’s shares have extended their slump into the start of 2013 while the U.S. stock market has continued to zoom higher, threatening to undermine another year for guys like Einhorn.

This is not the kind of thing that billionaire hedge fund managers take lightly and on Thursday Einhorn sued Apple and told CNBC that Apple has a “depression" mentality. He also issued a press release urging Apple’s shareholders to later this month vote against Apple’s management proposal to eliminate Apple’s ability to issue preferred stock from Apple’s corporate charter. Einhorn is frustrated that Apple is not leveraging its $137 billion of cash on its balance sheet to help support Apple's share price. He has unsuccessfully been lobbying the company for months to issue perpetual preferred shares to its shareholders that would pay a nice yield and give hedge fund managers a new security to trade, which is the kind of thing they love.

Instead of taking Einhorn’s advice, Einhorn claims that Apple Chief Executive Tim Cook is trying to make it impossible for the company to issue preferred shares, bundling a proposal to eliminate preferred stock with two other proposals that shareholders would find very easy to vote for—majority voting for directors and establishing a par value for Apple’s common stock. In a court document filed by Einhorn’s Greenlight in federal court in Manhattan, Greenlight claims that Securities & Exchange Commission regulations “flatly prohibit this kind of ‘bundling’ of distinct proposals.” In the last week Einhorn has tried to convince Cook and Apple to separate the three proposals but the company has refused, the court document says.

Einhorn’s move is the latest escalation of tensions between New York and Silicon Valley, between hedge funds and big tech companies. Silicon Valley hates being told what to do by money managers in New York. They view guys like Einhorn with suspicion if not downright disdain. At the start of this week Michael Dell announced he was leading an effort to take Dell private as the company’s share price continued to slump. Dell hasn’t said so, but it seems likely he knew that eventually someone like Einhorn or Carl Icahn would take an activist position in Dell’s shares and start telling Dell what to do—or demand he give up his management position all together.

In Silicon Valley, it has become popular to find creative ways to shield management and corporate founders from shareholder pressures, either by creating super-voting stock or trying to avoid the stock market all together. But that doesn’t necessarily mean that Einhorn’s ideas are not good for Apple. Another New York hedge fund agitator, Daniel Loeb, not so long ago shook things up at Yahoo, forcing the struggling company’s chief executive out, joining the board of directors, and helping to install a rock star chief executive, Marissa Mayer. At first Silicon Valley seemed to roll its eyes at Loeb, but so far his intervention at Yahoo has looked like a resounding success.

In many ways, Einhorn’s effort at Apple is much more modest. He said that Apple CEO Cook is “doing an excellent job.” But Apple’s general devotion, inspired by Steve Jobs, to fence off and protect its cash hoard has been incredibly strong. Einhorn seems to be testing how well hedge funds and Silicon Valley can work together. The down side for Apple is that if Einhorn and other big hedge fund holders lose faith in the company as a timely investment, its share price might sink even further.